Bond yields fall on fiscal treaty result

THE GOVERNMENT bond market reacted positively to the result of Ireland’s fiscal treaty referendum with investors buying up short-dated Irish Government debt.

The effective interest rate – known as yields – on outstanding Government bonds that mature in two years fell yesterday.

The yield at the start of trading yesterday stood at 7.8 per cent. Following a large fall in the early afternoon as the result of the referendum became clear, the yield fell to a low point of 6.6 per cent.

In the final few hours of trading the gains were partially reversed, as the yield on the two-year bond closed at 6.9 per cent.

Although less marked, the same pattern was evident in the yield pattern of the five-year bond over the course of the day.

At the opening the yield stood at 7.5 per cent, before falling to 7.1 per cent in early afternoon trading. In the final hour of trading, however, the yield rose again to close at 7.2 per cent.

The performance of short- and medium-dated Government bonds yesterday was in contrast with those of other troubled euro area governments. In Spain and Italy, yields declined by much less than in Ireland over the course of the day.

General uncertainty over the future of the euro zone and weak jobs data from the US continued to drive a flight into German government debt. This reached new levels this week as investors bought short-term German debt at a negative yield. The trend was particularly marked yesterday.

Negative interest rates are a sign of chronic fear as investors cease being concerned about earning a return and instead seek the security of not risking a capital loss.